GDP & Market Capitalization

Market Cap to GDP ratio (The Buffet Indicator) is a long-term valuation indicator for stocks. It has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."

'Market Cap to GDP' is commonly defined as a measure of the total value of all publicly-traded stocks in a country, divided by that country’s Gross Domestic Product. If the ratio falls between 50% and 75%, the market can be said to be modestly undervalued. Also, the market may be fair valued if the ratio falls between 75% and 90%, and modestly overvalued if it falls within the range of 90% and 115%.

At the end of May 2021, the total number of listed securities in Dhaka Stock Exchange stood at 604. Among these, there were 336 companies, 37 mutual funds, 221 government bonds, 8 debentures, and 2 corporate bonds.  The market capitalization of DSE stood at BDT 5038.69 billion which was 7.04 percent higher than that of April 2021. The ratio of market capitalization to GDP (at current market price) stood higher at 18.02 percent at the end of May 2021, up from 16.83 percent at the end of April 2021.

The market capitalisation-GDP ratio soared in FY2021 due mainly to a surge in the market capitalisation after listing of 16 companies, including three banks.In addition, Beximco Green Sukuk raised Tk 3,000 crore in August 2021 and the Sukuk was listed on the DSE.

However, fund raising from the stock market through IPO fell by 57 per cent in FY22 compared with that in the previous fiscal. Eight companies got listed during the year and raised Tk 699.36 crore through IPOs, while 16 companies raised Tk 1,610.6 crore through IPOs in FY21. Market operators said that share prices of large capitalised companies, including Grameenphone, Square Pharmaceuticals, Beximco Pharmaceuticals, and British American Tobacco Company declined in the second half of FY22 and kept the market capitalisation stagnant. The market capitalization of the DSE as a percentage of the country's GDP was also the lowest at 13.2% mong emerging Asia-Pacific countries.

The ratio reached its highest point of 50.67% in 2010, but it dropped to 33.23% within a year after the biggest market crash in the country's history in 2010-11.

Over the long term, the returns from stock market are determined by these factors:

1. Interest rate

The higher the interest rate on government securities, the greater the downward pull on stock market. If the government rate rises, people will invest more in government securities in anticipation of higher returns, and they will view investing in the stock market as unprofitable. In contrast, a decline in government interest rates increases the prices of all other investments.

2. Long Term Growth of Corporate Profitability

During recessions, corporate profit margins shrink, and during economic growth periods, corporate profit margins expand.

3. Dividends

Dividends are an important portion of the investment return. Dividends come from the cash earning of a business. Everything equal, a higher dividend payout ratio should result in a lower growth rate. If a company pays out dividends while still growing earnings, the dividend is an additional return for shareholders in addition to the increase in business value.